The US Supreme Court has granted President Joe Biden’s administration the opportunity to defend certain enforcement proceedings conducted by the Securities and Exchange Commission (SEC). This case has significant implications as it could undermine the power of federal agencies. The lower court previously ruled that these enforcement proceedings violated the right to a jury trial and encroached upon the authority of the president and Congress. The specific case involves hedge fund manager George Jarkesy, who was fined and banned from the industry by the SEC for securities fraud.
This case is part of a broader trend of legal challenges against the actions of the SEC, which is responsible for enforcing federal laws to protect investors. The Supreme Court, with its conservative majority, has shown doubts about expansive federal regulatory power. In 2018, the court criticized the way the SEC appointed its in-house judges, and in April of this year, allowed targets of SEC actions to challenge agency processes immediately in federal court.
The SEC’s investigation into Jarkesy began in 2011. He had established two hedge funds through his investment advisory firm, Patriot28 LLC. These funds had approximately 120 investors and managed around $24 million. The SEC brought charges against Jarkesy and his firm before an in-house judge. The judge’s findings were upheld by the agency, determining that Jarkesy and his firm had violated the Securities Act of 1933 and other laws by misrepresenting the funds’ auditor and the value of their holdings. The SEC imposed a $300,000 civil penalty, ordered Patriot28 to disgorge nearly $685,000 in ill-gotten gains, and banned Jarkesy from the securities industry.
One of the key issues in Jarkesy’s case is whether the SEC’s ability to seek monetary penalties for securities fraud through in-house adjudications, rather than federal court, violates the right to a jury trial as guaranteed by the Seventh Amendment. The Fifth Circuit Court of Appeals invalidated the SEC’s decision against Jarkesy in 2022, ruling that the proceedings denied him a jury trial. The court also concluded that the SEC had been given excessive power to decide whether to pursue cases in-house or in federal court, and that the protections afforded to administrative judges made their removal too difficult, infringing on the constitutional powers of the president.
The reduction of regulatory authority of federal agencies has been a prominent objective for business and conservative groups. They have expressed concerns about what they refer to as the “administrative state.” The Supreme Court’s recent rulings on limiting the scope of federal agency powers, particularly regarding the Environmental Protection Agency’s regulatory reach, have made it more challenging to protect wetlands and issue extensive regulations related to greenhouse gas emissions from power plants.
In conclusion, the US Supreme Court’s decision to hear President Biden’s administration’s appeal regarding SEC enforcement proceedings could have far-reaching consequences for federal agencies’ authority. The case involving George Jarkesy highlights the ongoing scrutiny of the SEC’s actions and raises fundamental questions about the right to a jury trial and the balance of power between different branches of government. This case aligns with a broader effort to curb the regulatory powers of federal agencies, which have significant influence over various key areas such as energy, the environment, climate policy, and workplace safety.
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